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Should We Use Linearised Models to Calculate Fiscal Multipliers?

Jesper Lindé and Mathias Trabandt ()

No 64, European Economy - Discussion Papers 2015 - from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission

Abstract: We calculate the magnitude of the fiscal spending multiplier in linearised and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price re-optimisation. We show that the nonlinear solution is associated with a much smaller multiplier than the linearised solution in long-lived liquidity traps, and pin down the key features in the model which account for the difference. Our results caution against the common practice of using linearised models to calculate fiscal multipliers in long-lived liquidity traps.

JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2017-07
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Should we use linearized models to calculate fiscal multipliers? (2018) Downloads
Working Paper: Should We Use Linearized Models To Calculate Fiscal Multipliers? (2017) Downloads
Working Paper: Should We Use Linearized Models To Calculate Fiscal Multipliers? (2017) Downloads
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